Xon. C. Ii6 Cavness 

State Auditar 

Austin, Texas 

Attention,: Hem* Chas. C, Collum, Assistant State Auditor, 

bear 31~: 

YOU 

meat upm the 

“It 

Ren The franchise tax liability 

of a corporation on notes 

glvea to fimace real property improvements, after 

these notes have been assigned by the original holderS the real property has 

beka sold, ana the purchaser ha0 assumed 

of. 

paymkt therehave requested the opinion of thFs Departfollowing factual si%uatiea* 

is requested that you render to this 

office en opinion as to the coastructioa of a 

corporation’s liability @der Sec. 7084 R. C. 

3# In our examination of franchise tax returns ne find c@rperatioas which have borroued timpy on their own notes, Um pavents of 

whMh &ater have been assume3 by indlviauel 

purc&@e@d un6Ter the circumstrtaoesimilar to 

th& &ascribed $pzreinafter P 

“pktflty Defeese Housing Company, a carporatliwb, the owner of unlmpreved $eal. estate, 

finanaes improvements thereon by borrowing 

from W. Ko Ewkg and Company, giving Fidelitgss 

notes+ snah ea lkhiblt *Ap attsahea. These 

n,ete,a by theb terms are psyable over e period of: byes&y-five years atpa are sedured by 

mortgages a&in& the real es%3te~ A8 long 

as these netea are direct l b3tigatlow of Fiaelitg, there appears to be rim qussU.oai but 
, 

Hon. C, Ii. Cavness, Page 2 (V- 500) 

that each such note should be included in tsxable capital for franchise tax purposes as 

provided by Article 7084 (A) R. C. 3. Rowever, two changes operate to effect circumstances; the first Is that Ewing sells the 

notes, without recourse, to different lnsurenae companies; the second is that Fidelity 

sells the reel estate and the purchasers assume the respective obligations of paying the 

twenty-five year notes as shown In deeds of 

trust, such as Rxhlblts 'B-1' end 'B-2' attached. (You will observe that in EZhibit 

'B-2' E. JT. Burke is shown es vendor; the form 

Is the same, and Rxhiblt Q-ils should be considered as if Flaelltg were shown es the vendor.) 

"In the first change mentioned above, 

Ewing, another corporation, in turn sells the 

notes to an insurance company, still another 

corporation, which receives the notes under 

a couveyance form such as Rxhlblt sCQ attached. 

"After Fidelity has sold the real estate 

and the purchaser thereof has assumed Flaelltyss 

obligation to pay the installment note, is the 

amount of the note properly lncludlble as taxable capital of Fidelity under Sec. 7084 (A)?" 

Article 7084, R. C. 3. 19259 as amended, provides In part es follows: 

"(a) Except es herein prsvided, every domestic end foreign corporation heretofore or hereafter chartered or authorized to do business in 

Texas, or doing business la Texan, shall, on or 

before May 1st of each year, pay in advance to 

the Secretary of State a franchise tax for the 

year following, based upon that proportion of 

the outstanding capital stock, surplus and undivided profits, plus the emount'of outstanding bonds, notes and debentures, (outstanding 

bonds, notes, and debentures shall include all 

written evidences of indebtedness which bear 

a maturity date of one (1) year or more from 

date of issue D y *It (Emphasis supplied) 

Your questlon hes never been passed upon by our 

Courts, and its answer must aaeceaserily depend solely upon 
Bon. C. H. Cavness, Page 3 (V- 500) 

the construction to be placed upon Article 70849 quoted 

above, If the notes in question constitute "outstanding notes" of the corporation then the amounts thereof 

must be included as taxable capital of the corporation. 

If, on the other hand, they do not constitute 'outstanding notes" as that term is used in Article 7084, V. C. 

3 +, them the amounts thereof shouldrpt be included as 

taxable capital of the corporation. 

It is well settled in this State, when one 

gives his note secured by a deed of trust on real estate and then subsequently sells the reel estate, the 

purchaser thereof assuming the obligation of paying off 

the note, the purchaser Is deemed prlmarFlg 1Fable on 

the notes and the mortgagor becomes liable as surety. 

Prior to the sale of the real estate securing one of the notes and the assumption by the purchaser 

thereof of the payment of the note, it is clear that the 

amount of the note should be Included in the amount of 

the t,axable capital of Fidelity* However, when Fidelity 

sells the real estate together with the improvements made 

theresn with the funds obtained by executing one of the 

notes la question, and the purchaser thereof assumes the 

payment of the note, Fidelity becomss only secondar%ly 

liable on the note as surety. From and after the date 

of the sale, Fidelity is relieved from all liability on 

the note unless two contingencies occur: First, that 

the purchaser fails and refuses to pay the note, and 

secondly, that sale of the realty will not bring enough 

to satisfy the note, We do not believe under such circumstances such notes constitute "outstanding notes", 

as that term is used in Article 7084, V. C, S., as amended. 

In a letter opinion, dated August 20, 1934, to 

Ron. W, W, Heath, then Secretary of State, this department had before it a factual situation where a corporation purchased land and in part payment thereof gave two 

vendorDs lien notes, The corporation sold said iand to 

a purchaser who assumed payment of the two notes previously executed by the corporation. It was held that after 

the corporation sold the land to the purchaser, who assumed payment of the vendorvs lien notes thereon9 the 

corporation should not include the ameunt of these notes 

in its taxable capital under the provisions of Article 

7084, v, c. s. While Article 7Q84, V, CQ So, has been 

emended since the date of that letter opinion, the portion of the Article pertinent to this opinion was not 

changed. 
Hon. C. H. Cavness, Page 4 (V-500) 

In accordance with the letter oplalon dated August 20, 1934, the Secretary of State has consletentlg eon- 

&rued the applicable provlalons of Article 7084, supra, 

in situations arlslng In similar cases that upon the assumption of a written evidence of inclebtednesa secured 

by a lien on real or personal property by the purchaser 

thereof the b,orrowecl c8pltal evldenoed by the execution 

of the orlglnal weltten. evidence of indebtedness ceased 

to be used by the corporetton as a part of its taxable 

vorklng capital. This construction has been uniformly 

adhered~ to for’s per&id of over thirteen years, and under the well-establlsh4d rule of law In Texas such departmeat constructlon is entitled to great weight. 

peyoe of tit 

ties without 

It is our opinion the amount of the notes exeIs Umnateriel that Ewing and Company, the 

notes, aubssquently sold them to third parcecourso. 

cuted by the Fidelity Def’onse liourlng Company tb W. K. 

Ewing aad Company should not bs included for the purpose 

of taxation under the 

E” 

ovirions of Article 7084, V.&S., 

as ameaded, after Fide ItJ has sold th8 real estate securlug the notes and the purchaser thereof has assumed 

pagneat sf the notes. 

more 

meat 

upoa 

Notes executed by a corporation, maturing 

than one year from date of issue, la payof money borrowed to erec’t improvements 

property which It subaequehtly sold to 

pnrcaasers who as8ume payment of such notes, 

a4 not constitute “outstanding notes” of such 

corporation taxable under the provisions of 

Article 7084, V. C. sDO as amended. 

Yours very truly, 

ATTORNEY CiERRRAL OF TEXAS 

ATTORNEY @NNERAL